The Troika and financial assistance in the euro area: successes and failures | Guntram B. Wolff, Carlos De Sousa, André Sapir and Alessio Terzi at Bruegel.org

The Troika and financial assistance in the euro area: successes and failures | Guntram B. Wolff, Carlos De Sousa, André Sapir and Alessio Terzi at Bruegel.org




Highlights 
Executive Summary
""The size of the programmes reflects the magnitude of the imbalances that had built up in the pre-crisis period.""..
..""The Greek programme cannot be judged as successful at this stage.""...
...""there is widespread doubt that the country will be able to regain market access without some form of write-down of its publicly-held debt""...
...""Economic adjustment programmes in the euro area involve three types of conditionality: fiscal measures aimed at reducing public debts and deficits; financial measures to restore the health of the financial sector; and structural reforms to enhance competitiveness.""...

In the case of Greece, it is hard to see how the country could exit from its programme at the end of this year without some form of further debt relief and an accompanying framework to improve the structural drivers of growth.   

Overall Assessment

Correcting the major disequilibria in the Greek economy was bound to be a titanic challenge. The combination of excessively large public and private debt, an overvalued real exchange rate, a fragile government apparatus, languishing political ownership, and a weak and closed business sector meant that adjustment was going to prove challenging. The policy conundrum was further aggravated by the initial European indecision as to how to deal with a debt crisis in monetary union, the increasing hostility vis-à-vis further assistance to Greece, and even threats to push Greece out of the euro. Given these circumstances, the fact that Greece managed to stay in the euro can be considered a success

The Troika was not responsible for the extraordinary circumstances. Yet, it is clear that the programme was not robustly designed. This fact was already well-known at the beginning of the programme: internal IMF documents made public by the Wall Street Journal show that from the beginning, very serious concerns were raised on the debt sustainability and the fragility of the programme.

The Troika was not responsible for the extraordinary circumstances. Yet, it is clear that the programme was not robustly designed. This fact was already well-known at the beginning of the programme: internal IMF documents made public by the Wall Street Journal show that from the beginning, very serious concerns were raised on the debt sustainability and the fragility of the programme.

 The Troika was not responsible for the extraordinary circumstances. Yet, it is clear that the programme was not robustly designed. This fact was already well-known at the beginning of the programme: internal IMF documents made public by the Wall Street Journal show that from the beginning, very serious concerns were raised on the debt sustainability and the fragility of the programme. The Troika and European political leaders did not err on the side of caution and did not allow for a programme to be calibrated with greater chances for success, including accepting an early debt restructuring. The misreporting of Greek public finance should have been an early warning that should have led to more caution. Pisani-Ferry, Sapir and Wolff (2013, p75) concluded:

""

“Political reluctance in Europe to start debt restructuring, the fear of potential moral hazard effects and the absence of effective mechanisms to contain its possible financial fall-out made this option unappealing. The alternative, nearly-concessional lending within the framework of a large and long-lasting assistance programme, was not politically  palatable either. This conundrum led the IMF and the EU to bet on the materialisation of optimistic tax revenue and privatisation assumptions. Instead of formulating a robust programme capable of withstanding adverse economic, political and financial developments, they did just the opposite. It is no  surprise that these optimistic assumptions were not vindicated by

  events.” 

Under all the three criteria outlined at the end of section 2 as measures of programme success, financial assistance to Greece cannot be deemed successful at this stage: price and non-price competitiveness seems far from being restored, financial market access will most likely not be re-gained in the near future, structural reforms are progressing only at slow pace, and Troika programme assumptions were amply  proved wrong.

Greece stayed in the euro, a return to the markets may become eventually possible, but certainly the  programme can be considered as the least successful one within the euro area. The issue of social fairness has become more important, both in the Troika documents as well as in the public discourse, yet little  progress on reducing the fundamental unemployment problems, especially for the young, has been made to date. Overall, the path to a successful exit from the programme is not yet fully chartered and visible.